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Why The Tesco PLC Bears Are Wrong

My Foolish colleague Alessandro Pasetti recently opined that Tesco (LSE: TSCO) is too big and too geographically widespread, and that it needs to slim down. In particular, Tesco’s European operations need to be shuffled off this mortal balance sheet, even if the company needs to take a paper loss.

Europe just isn’t growing, and last week’s first-quarter results told us that adverse currency-exchange movements turned a constant-currency sales rise of 0.5% into a fall of 8%. Business in Asia isn’t doing as well as expected, either.

TescoAlternative views

While I don’t doubt the effect these problems are having on Tesco’s bottom line, in the Foolish spirit of offering competing views to help us see a company from all sides, I suggest that divestment of European and Asian business is not what Tesco should be doing — at least, not now.

At the moment, Europe is really lagging behind the UK in the economic recovery stakes, and a time of retail austerity following one of the biggest financial crises in history is not the best time to evaluate the worth of a company’s operations in that market.

If Europe should still be stagnating in another couple of years, then maybe another look at pulling out would get my support. But in the year just ended in February 2014, Tesco still made a trading profit in Europe — a small one of £238m, but still a profit.

Asian woes

In Asia, the 2013-14 year generated a £692m trading profit. That was down, but it’s still a profit. And though subsequent first-quarter sales fell by 3.2%, Thailand is one of Tesco’s earliest and biggest Asian markets — and that country has been troubled with political strife leading to a military coup and curfews. That’s not Tesco’s fault, and in the longer term those Asian markets should return to decent growth.

If you pull out of every market when it’s in a slump, the only sure result is that eventually you’ll pull out of everywhere. Maybe some overseas operations will need to be dumped, but I really don’t think the time is now.

It’s the UK that counts

And anyway, the UK accounted for a full two-thirds of trading profit in the year just ended, and that’s really where I think Tesco’s efforts need to be focused.

And that’s where they have been. Tesco has slashed a lot of prices for staple foods, following the lead of Asda from a couple of years ago, and that will inevitably lead to lower sales figures — the company already expects that, and is repositioning itself as more of a one-stop-shop than a bulk discounter in the longer term.

Maximum pessimism

Overall, the headline stories about Tesco in the past week have had my “maximum pessimism” alarms going off, and many are clamouring for quick fixes — like calls for chief executive Philip Clarke’s head.

But a time of maximum pessimism is not a time to be bearish, it’s a time to be bullish.

To borrow a BBC headline, it’s time to “Keep calm and carry on“.

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Alan does not own any shares in Tesco. The Motley Fool owns shares in Tesco.